Abstract

In the Wealth of Nations Smith says that

when the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of labour, and the profits of the stock employed in the raising, preparing and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price. (Smith 1776, p. 72)

In the same chapter he explains that in economic theory this particular price level is important because it is a sort of benchmark for the actual price of the commodity, its market price (p. 73). The market price is different from the natural price but tends to move towards it all the time because of competition between producers. ‘The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continuously gravitating’ (p. 73). Smith’s concept of natural price and his description of the competitive mechanism which guarantees that the market prices tend to move towards it became an important element in classical political economy. Smith’s analysis was entirely subscribed to by Ricardo (Ricardo 1821, pp. 88–91), and was a central point in the classical theory of value and in the price theories of some neoclassical economists.

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